Market Segmentation

Any single product does not necessarily appeal to all customers alike, it varies depending on their needs, taste and lifestyle. Therefore, in order to make their marketing strategies effective the sellers segregate the markets, also termed as market segmentation.

Market segmentation is the division of markets into categories or groups of customers with similar tastes or needs; it would also be based on the region, income group, cultures, etc. The markets are divided into segments so as to enable the seller to market his products in an effective manner.  It helps the seller in identifying which market sectors are most important and how to best address its needs.Sometimes even the same product is advertised in different ways to different groups, and in some cases the product is modified to appeal to a specific group of buyers. In general, it is used to maximise the impact of advertising expenses incurred by the seller.

Market segmentation can be done on the following basis:

Demographic segmentation:

Segmentation is done on the basis of gender, income, age, educational qualification, profession etc. The segmentation can include one factor or several factors in combination. For instance, music downloads are tend to be targeted to the young, while hearing aids are targeted to the elderly; some products are targeted only to women and others only to men.

Geographic segmentation:

Markets can be segmented on the basis of its geographic width, maybe globally or even on local basis. In many situations the needs of potential customers in one geographic area are different from those in another area. This may be due to climate, custom, or tradition.

Price segmentation:

A market can be segmented on the basis of variable prices charged. A same product can be sold at two different prices depending on varying income levels, geographical differences, etc.

Lifestyle segmentation:

The market is segmented on the basis of customer attitude, behavior, emotions, habits, interests, perceptions, speculation etc. This technique is particularly useful for the service industry and lifestyle products.

Time segmentation:

This is based on market dependency on the time factor. It could be on the basis of seasonal demand fluctuations, weekday and weekend fluctuations, or even daily fluctuations.

Regulatory bodies for financial institutions.

As the financial institutions play a key role in the growth of a nation, they also need to be regulated for structured growth of the nation. The various regulatory authorities in India are:

·         Reserve Bank of India:

The Reserve Bank of India (RBI) is the apex financial institution of the country; and is the regulator for financial and banking system, formulates monetary policy and prescribes exchange control norms. The Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 authorize the RBI to regulate the banking sector in India. The RBI also regulates foreign exchange under the Foreign Exchange Management Act (FEMA). The Reserve Bank of India performs the supervisory function under the guidance of the Board for Financial Supervision (BFS). The primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. As a regulator and supervisor of the financial system, the RBI undertakes the following:

§  prescribes broad parameters of banking operations within which the country’s banking and financial system functions.

§  protect depositors' interest

§  provide cost-effective banking services to the public.

§  authorises setting up of payment systems

§  lays down standards for operation of the payment system

§  issues direction, calls for returns/information from payment system operators.

·         Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) formed under the Securities and Exchange Board of India Act, 1992 with the prime objective of:

·         protecting the interests of investors in securities

·         promoting the development of the securities market and

·         regulating the securities market.

Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for:

·         regulating the business in stock exchanges and any other securities markets

·         registering and regulating the working of stock brokers, sub-brokers etc.

·         promoting and regulating self-regulatory organizations

·         prohibiting fraudulent and unfair trade practices Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self - regulatory organizations, mutual funds and other persons associated with the securities market.

·         Insurance Development and Regulatory Authority (IRDA)

Insurance Development and Regulatory Authority (IRDA) is the regulatory authority in the insurance sector under the Insurance Development and Regulatory Authority Act, 1999. The prime objectives of IRDA are:

o   to protect the interests of the policyholders

o   to regulate and promote competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market

o   and for matters connected therewith or incidental thereto.

Financial institutions in India

Financial sector plays an important role in the overall development of a nation. The most important aspect of this sector is the role of the financial institutions. Financial institutions provide service as an intermediary of the financial markets. They are responsible for transferring funds from investors to companies who are in need of funds. The financial institutions play an important role in complementing the facilities offered by the banks in an economy. In fact, the existence of Banking and Non Banking Financial Institutions is supported by efficient money and capital markets keep the financial sector complete and enhance the overall growth of the economy.

Financial institutions can be of different types in accordance with the financial systems of different economies. In India, the financial system includes various types that are as follows:

·         Central Bank

The central bank of the country is the Reserve Bank of India (RBI); it is the apex financial institution of the country. It is needed to regulate and control the monetary system of the economy. It has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union. Other functions include; issue of currency notes, banker’s bank, custodian of Foreign Exchange reserves, Clearing House functions, etc.

·         Commercial Banks

A commercial bank is a type of financial institution and intermediary. It is provides deposits and lending services to its customers. It is the most important part of modern banking set up. Its functions are confined not only to advancing loans to the public and accepting their deposits but also their contribution in accelerating the rate of economic development of the country. They also facilitate the flow of goods and services from producers to consumers and helps in financial activities of the government. They provide a large portion of our medium of exchange and they are the media through which monetary policy is affected. The commercial banks can be categorized into three types:

o   Public sector banks

o   Private sector banks and

o   Foreign banks

·         Credit Rating Agencies:

Credit Rating Agencies provide grading of corporate debt instruments and assist lenders to form an opinion on the relative capacities of the borrowers to meet their obligations. A credit rating for an issuer takes into consideration the issuer's credit worthiness and affects the interest rate applied to the particular security being issued. The Credit Rating Agencies play an important role in assessing risk and its location and distribution in the financial system. By facilitating investment decisions they can help investors in achieving a balance in the risk return profile and at the same time assist firms in accessing capital at low cost. They assist and form an integral part of a broader programme of financial disintermediation and broadening and deepening of the debt market. A credit rating can for a company, an individual or even a country.  The main credit rating agencies in India are:

§  Credit Rating Information Services of India Limited (CRISIL)

§  ICRA Limited (Controlled by Moody’s)

§  Credit Analysis & Research Limited (CARE)

§  Fitch Ratings India Private Limited (Fitch)

§  Brickwork Ratings India Private Limited

§  SME Rating Agency of India Limited (SMERA)

·         Insurance Companies:

Insurance companies are in the business of assuming risk on behalf of their customers in exchange for a fee, termed as premium. The companies earn through by charging premiums that are sufficient to pay the expected claims to the company including a profit. The types of insurances are categorized into two:

§  Life Insurance and

§  General Insurance.

       The various insurance companies in India are:

§  Life Insurance Corporation of India

§  National Insurance Company Ltd

§  New India Assurance

§  Bajaj Allianz Life Insurance Company Limited

§  Reliance General Insurance

§  Tata AIG General Insurance, etc.

·         Merchant Banks:

Merchant banks deals mostly in international finance, long-term loans for companies and underwriting. They do not provide regular banking services to the general public. They also provide services like syndication of financing, promotion of projects, investment management and advisory services. Merchant banking is generally also understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies. Both commercial banks and investment banks may engage in merchant banking activities.

·         Mutual Funds:

A mutual fund is a trust which is professionally-manages various types of collective investment schemes that pools money from many investors who share a common financial goal. Each scheme of a mutual fund can have different character and objectives. The money collected is invested in various capital market instruments as defined for that particular scheme. Mutual funds are meant mostly for small investors, as investments in stock markets require careful analysis of companies which is not possible for a small investor. Mutual funds are usually fully equipped to carry out thorough analysis and can provide superior returns. The various mutual funds in India are:

§  HDFC Mutual Fund

§  Prudential ICICI Mutual Fund

§  Tata Mutual Fund

§  Franklin Templeton India Mutual Fund

§  Kotak Mahindra Mutual Fund, etc.

Book Building

Book building is a technique used for marketing a public offer of equity shares of a company. It is a way of raising more funds from the market. After accepting the free pricing mechanism by the SEBI, the book building process has acquired too much significance and has opened a new lead in development of capital market.
A company can use the process of book building to fine tune its price of issue. When a company employs book building mechanism, it does not pre-determine the issue price (in case of equity shares) or interest rate (in case of debentures) and invite subscription to the issue. Instead it starts with an indicative price band (or interest band) which is determined through consultative process with its merchant banker and asks its merchant banker to invite bids from prospective investors at different prices (or different rates). Those who bid are required to pay the full amount. Based on the response received from investors the final price is selected. The merchant banker has to manage the entire book building process.
Investors who have bid a price equal to or more than the final price selected are given allotment at the final price selected. Those who have bid for a lower price will get their money refunded.
In India, there are two options for book building process. One, 25 percent of the issue has to be sold at fixed price and 75 per cent is through book building. The other option is to split 25 percent of offer to the public (small investors) into a fixed price portion of 10 percent and a reservation in the book built portion amounting to 15 per cent of the issue size. The rest of the book-built portion is open to any investor.
The greatest advantage of the book building process is that this allows for price and demand discovery. Secondly, the cost of issue is much less than the other traditional methods of raising capital. In book building, the demand for shares is known before the issue closes. In fact, if there is not much demand the issue may be deferred and can be rescheduled after having realised the temper of the market.

Sec. 147: Retrospective amendment does not mean failure to disclose material facts

CIT vs. M/s K. Mohan & Co. (Exports) (Bombay High Court)

After the expiry of four years from the end of the assessment year, the AO reopened the assessment u/s 147 by relying on the retrospective amendment to s. 80HHC by the Taxation Laws (Amendment) Act, 2005 w.e.f. 1.4.1998. The CIT (A) and Tribunal (included in file) struck down the reopening. On appeal by the department, HELD dismissing the appeal:

The assessment was sought to be reopened on account of retrospective amendment to s. 80HHC introduced by the Taxation Laws Amendment Act, 2005 with effect from 1st April 1998. If the legislature amends the provisions of the Act with retrospective effect, it cannot be said that there was failure on the part of the assessee to disclose fully and truly all material facts relevant for the purpose of assessment.

Sec. 147: AO must specify what facts are failed to be disclosed. Lapse by AO no ground for reopening if primary facts disclosed

Atma Ram Properties Pvt Ltd vs. DCIT (Delhi High Court)

In AY 2001-02, the AO assessed advances of Rs. 1.56 crores received from a group concern as “deemed dividend” u/s 2(22)(e). In appeal, the CIT (A) held that the advances received in earlier years could not be assessed. The AO thereafter reopened the assessment for AY 1999-00 (after 4 years from the end of the AY). Though the AO alleged that there was a failure on the part of the assessee to disclose full and true material facts, he did not specify what that failure was. The reopening was upheld by the CIT (A) & the Tribunal. On appeal to the High Court, HELD allowing the appeal:

(i) In AY 1999-00, the AO inquired into the details of advances received but did not make any addition u/s 2(22)(e). If the AO fails to apply legal provisions, no fault can be attributed to the assessee. The assessee is merely required to make a full and true disclosure of material facts but is not required to disclose, state or explain the law. A lapse or error on the part of the AO cannot be regarded as a failure on the part of the assessee to make a full and true disclosure of material facts;

(ii) Though the recorded reasons state that the assessee had failed to fully and truly disclose the facts, they do not indicate why and how there was this failure. Mere repetition or quoting the language of the proviso is not sufficient. The basis of the averment should be either stated or be apparent from the record;

(iii) Explanation (1) to s. 147 which states that mere production of books is not sufficient does not apply a case where the AO failed to apply the law to admitted facts on record.

(iv) The allegation that the assessee did not disclose the true and correct nature of payment received from the sister concern nor disclosed the extent of holding of the sister concern so as to enable the AO to apply his mind regarding s. 2(22)(e) is not acceptable. The assessee had filed statement of accounts of each creditor and indicated them to be sister concerns. The primary facts were furnished. The law does not impose any further obligation of disclosure on the assessee (CIT vs. Burlop Dealers Ltd 79 ITR 609 (SC) followed).

Note: Contrast with Dalmia Pvt Ltd vs. CIT (Delhi High Court) where it was held (reopening after 4 years) that despite specific & pointed queries in s. 143(3) assessment, AO cannot be said to have formed any opinion if “explicit opinion” was not recorded

Fundamental analysis

Fundamental analysis is the detailed assessment of a firm's future or growth which gives a fair idea about its worth in the stock market. This involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, competition and all the financial aspects dealing with a company's performance and survival. This done to gain insight on a company's future performance. Fundamental analysis takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data.

The outcome of fundamental analysis is a value of the stock of the company called its ‘intrinsic value’ also known as ‘target price’. To a fundamental investor, the market price of a stock tends to revert towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would purchase the stock because he believes that the stock price would rise and move towards its intrinsic value. If the intrinsic value of a stock is below the market price, the investor would sell the stock because he believes that the stock price is going to fall and come closer to its intrinsic value. To find the intrinsic value of a company, the fundamental analyst initially takes a top-down view of the economic environment; the current and future overall health of the economy as a whole. After the analysis of the macro-economy, the next step is to analyze the industry environment in which the firm is operating. After which, one should analyze all the factors that give the firm a competitive advantage in its sector, such as, management experience, history of performance, growth potential, low cost of production, brand name, etc. Thus, fundamental analysis is all about evaluating a security's value based on an authentic set of information, both historical and present.